1031 is the IRS tax code that says the seller of a property can defer the payment of any capital gains on a sale if he uses the proceeds of that sale to buy a “like” property. Example: I sell my 100,000 square foot office building for $100,000. But I only paid $50,000 for the building. When I sell that building I have a gain of $50,000 (100 – 50). The government will tax you on that $50,000 gain UNLESS you do a 1031 exchange (there may be other tax shelters out there, but assume for now that a 1031 is the only way to avoid paying this gain). So in this case, if I turned around and bought another 100,000 square foot office building with that money, I would not have to pay the capital gains tax on the $50,000 because I bought a “like” property (must purchase a property of equal or greater value). Now note that this doesn’t mean the capital gains tax is wiped from the record. It’s still there. You just deferred it by buying a similar property. If you sell that similar property, you’ll have to pay that tax UNLESS… (I’ll let you fill in the rest). Note that “time is of the essence” when a principal is involved in a 1031 exchange. The rules state that you have 45 days from the date of closing on the old property to identify a list of properties, from which you will purchase the new property. From the date of closing, you have 180 days to close on a property from your 45-day list. Basically, this is a long winded way of saying that 1031 folks are highly motivated to identify suitable properties and meet the 1031 exchange deadlines.
Sep 24, 2008